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Rod Smith

MGM Mirage and Mandalay: $7.9 Billion Deal Reached

15 June 2004

Boards for both MGM Mirage and Mandalay Resort Group will meet today to consider a $7.9 billion buyout proposal that would create the world's largest gaming company, controlling the lion's share of the Strip's hotel rooms, convention space and slots.

The boards are expected to OK a revised all-cash offer of $71 per share by MGM Mirage, hammered out by the two Las Vegas-based companies over the weekend, to take over Mandalay.

Sources close to this weekend's talks said the deal got back on track after MGM Mirage negotiators dropped a $100 million cancellation clause that led Mandalay on Friday to reject the company's original $68 per share offer.

Mandalay President Glenn Schaeffer on Friday said the cancellation clause, which MGM Mirage added late last week, was a "deal killer" because it forced his company to bear most of the risk if regulators delayed or killed the deal. The sources said, in addition to a higher price, the new agreement puts the risk on MGM Mirage by requiring the company to do whatever is necessary to close the sale.

Further details were unavailable from either company, although other sources said Monday afternoon that documents are still being drafted.

If the deal closes, the buyout would be the largest in industry history, involving more than 30 casinos around the world, including some of the Strip's most profitable megaresorts, such as the Bellagio, MGM Grand, The Mirage, Luxor and Mandalay Bay as well as popular lower-end properties such as Circus Circus and Excalibur.

Analysts Monday said they were surprised agreement had been reached so quickly, especially because sources close to the negotiations said the weekend talks had been "tough." Some also noted it is rare for a buyer to increase a bid price and scrub complex contingency clauses from a deal at the same time.

Analysts and industry insiders said both boards of directors probably will act favorably on the buyout proposal when they meet today.

"I'm confident both boards will find the deal to be good for shareholders. You have a willing seller and and a buyer who was willing to be aggressive and realized the transaction should happen," said Deutsche Bank analyst Marc Falcone.

Analysts said the biggest stumbling block for the deal will be antitrust concerns at the federal and state levels.

Nevada Gaming Control Board Chairman Dennis Neilander said his agency will look at the pricing power the deal will give MGM Mirage and at the share of rooms, slots and tables the emerging company would control. However, he said it is unclear now whether his agency would consider the relevant market for measuring market concentration to be the Strip, Las Vegas or the entire state.

He said his agency will take up to six months to consider the antitrust implications of the proposed merger, perhaps longer depending on the availability of outside consultants it uses to evaluate deals.

In any event, he said the Control Board will not complete action on the merger, which it must approve, until the deal has been cleared by the Federal Trade Commission, should the federal agency decide to intervene.

A former top official at the FTC said Monday, based on related recent cases, it is virtually certain the agency will give the Mandalay sale a microscopic review, although it is not clear what divestitures, if any, the agency might require to close the deal.

However, sources close to the companies said Monday that with the new agreement, MGM Mirage appears ready to sell whatever properties regulators deem necessary.

Wall Street analysts believe MGM Mirage management and majority shareholder Kirk Kerkorian mainly wanted to add the Mandalay Convention Center, one of the largest private convention complexes in the world, to its properties, in addition to Mandalay's Las Vegas real estate holdings.

In addition to its four Strip resorts, Mandalay owns enough vacant land on South Las Vegas Boulevard near its flagship Mandalay Bay for several additional megaresorts.

Analysts said Las Vegas is particularly appealing to MGM Mirage for future development because the local gaming industry proved after the terrorist attacks Sept. 11, 2001, that it is very resilient compared with other destinations and because the state has a more benign regulatory and tax environment.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, added that the acquisition would give MGM Mirage free cash flow of more than $750 million a year, more than enough capital for the company to fund any possible expansion aspirations in the United Kingdom, Macau, Atlantic City and Las Vegas for the next 10 years.

Greff and UBS Warburg analyst Robin Farley said the company also hopes the merger will offset the competition expected to cut into its earnings when Wynn Las Vegas opens in April.

The downside of the deal, Greff said, is the extraordinary dependence MGM Mirage will have on Las Vegas, although he said the company has clearly concluded that operation and expansion prospects here are better than in other markets.

MGM Mirage surprised the gaming industry on June 4 when it announced its $7.65 billion unsolicited offer for Mandalay. Although sources reported continuing talks throughout the next week as being "friendly," Mandalay unexpectedly rejected the bid about three hours before a 5 p.m. Friday deadline.

Mandalay officials said the deal collapsed, not because of price, but because MGM Mirage's last-minute addition about risk assumption meant their company would have been prohibited from making any strategic decisions while regulators considered the deal.

However, sources close to the deal expect the new agreement to pass muster with the companies' boards and shareholders because the cancellation provision has been dropped and the new offer of $71 a share represents a premium of 30 percent over Mandalay's closing share price on June 3, the day before the initial offer was made.

Although Mandalay said it will present the new offer to its board today, the company said in a prepared statement neither Mandalay nor its management has entered into any final agreement and there can be no assurances that a definitive agreement will be reached.

Schaeffer declined Monday to discuss the new deal or the negotiations.

However, analysts said Mandalay Chairman Mike Ensign and Vice Chairman Bill Richardson, who together were former majority owners of the gaming company, and Schaeffer are motivated to get the deal done because of restricted shares they were granted in April worth $50 million.

Those shares only vest over three years, unless the company is sold, in which case they vest immediately, Falcone explained.

Neither Ensign, who got 405,000 shares free, nor Richardson, who got 300,000 shares, owned any stock in the company in April. Schaeffer, however, who got 121,500 shares, owned 364,395 shares as of May 10, filings show.

The new deal includes stock worth approximately $4.8 billion, $600 million in convertible debentures and assumption of approximately $2.5 billion in Mandalay debt currently outstanding.

After approval from both boards of directors, the companies will still have to finalize a definitive agreement that will have to be voted on by MGM Mirage and Mandalay shareholders.

The sale will then require approval from state and federal regulators.

MGM Mirage closed Monday at $48.20, up 60 cents or 1.3 percent on 2.1 million shares, double normal trading volume. Mandalay Resort Group closed at $67.60, down 82 cents or 1.2 percent on 10.5 million shares, five times normal trading volume.

MGM Mirage and Mandalay: $7.9 Billion Deal Reached is republished from